Finance:Private investment capital subscription

A private investment capital subscription (PICS), is a financial tool that relies on a small pool of investors’ money for real estate investments. The money managers of private investment capital subscriptions or PICS are real estate investment experts, who also invest in related real estate products such as tax lien certificates, foreclosures, notes, as well as development projects on behalf of their subscribers and themselves.

Operation

PICS operate similarly to a hedge fund in the sense that the money managers are highly skilled and knowledgeable real estate investors and there are great opportunities for investors to reap high returns. However, there are significant difference between PICS and other investment funds because PICS tend to function more like unregistered bonds, by promising the investor a set return on their investment and the added protection of their original investment dollars.

Another difference between PICS and hedge funds are the investors themselves. PICS investors are not required to have a large net worth and the number of subscribers is limited to thirty-five subscription members, who invest a maximum of One-hundred and fifty thousand dollars each. The total amount raised by a Private Investment Capital Subscription’s initial private offering is limited to Five million dollars. PICS commonly sell 33 subscriptions each worth One hundred and fifty thousand dollars to only thirty-three individuals (no family trusts, partnerships, corps. Etc. are permitted to participate), which raises $4,950,000.00. The two remaining subscribers of the 35 originally subscriptions available are sold to the expert money managers, who add $50,000.00 to the pool. In exchange for their expertise, the money managers share in the profits equally. Unlike hedge fund managers who generally do not contribute any money to the hedge fund but are compensated by the performance of the hedge fund, PICS managers contribute to the private investment capital subscription and are compensated only after the other thirty-three $150,000-subscription-investors are paid a guaranteed $15,000.00 or a 10% annual return on their investment. After the 10% payment has been made the PICS money managers may choose to keep, distribute or reinvest any additional profits earned from the $5,000,000.00 raised in initial offering.

Unlike a real estate investment trust or REIT, a Private Investment Capital Subscription does not give its investment subscribers any ownership in the real estate held and often PICS invests in real estate paper, such as trust deeds, notes, tax lien certificates and foreclosure properties. The actual ownership of the real estate and related products is held by the managers who are often a separate Limited Liability Partnership or Company.

Unlike hedge funds, which are generally opened to an unlimited number of highly sophisticated and well-heeled qualified investors, PICS cater to moderate-income investors who are worth $300,000.00, in excess of their primary residence, art collection and vehicles. The investor’s gross annual income must be at least $150,000.00 and of course the investor must have $150,000.00 to invest. Investors in PICS also sign a subscription contract agreement that states that the subscription investor is financially solvent to travel to any area in the world. The purpose of signing the travel agreement is to ensure the subscription investors the ability and the right to inspect any and all investments made by the PICS money managers.

After three years, PICS management reserves the right to buy back the subscription at the original price of $150,000.00 after the 10% annual earnings have been paid to the subscriber. However, money managers frequently elect to pay the investors substantially higher returns than the contracted 10% thus allowing the investors to participate in profit sharing distributions. The reason PICS managers often choose to distribute profits among the subscribers is to reward investors and to distribute the capital gains tax burden among the pool of investors. Because many investors use their self-directed IRAs to invest in private investment capital subscriptions these investors are not required to pay any capital gains taxes on the profits they receive until they withdraw the money from their self-directed IRA.

Preferred

Investors prefer Private Investment Capital Subscriptions to mutual funds, equity funds and hedge funds because real estate PICS focus on highly secured real estate products such as 70% loan to value loans, government backed tax lien certificates and under valued foreclosure properties. New PICS that invest in cellular phone and Internet industry, title insurance and finance market are now available.

PICS provide added security to investors on the value of their original investment because the underlying real estate collateral is protected by title insurance, fire insurance and liability insurance that are not found in stock market related investments and PICS pay a guaranteed 10% return on investment to their investors.

Despite the fact that investors in PICS are not classified as high-end money investors, Private Investment Capital Subscribers do form a rather exclusive private investment club. The fact that no single subscriber holds a greater interest than the others, because everyone invested the same amount gives every subscriber an equal voice. Everyone involved in PICS, from the managers to staff including the investors know each other on a first name basis. Investors can pick up a phone to discuss financial and market opportunities, issues and concerns directly with their money manager—this is an advantage that the average investor never experiences with large funds.

Drawback

A drawback to private investment capital subscription is the fact that the subscriptions are not transferable to heirs. The money managers are very selective of the people with whom they are willing to work. Therefore, upon the death of a PICS subscriber the initial investment of $150,000.00 and any pro-ration of the 10% annual interest earned is returned to the deceased estate.

Regulation

The Securities and Exchange Commission, and state-level departments of corporations, business, and commerce or state secretaries of state does not regulate Private Investment Capital Subscriptions, because PICS do not raise more than Five million dollars and PICS limit the number of subscriptions sold to participating investors to a total of thirty-five people.